CASH 2018 Special Proxy Statement

New disclosures required by ASU 2016-13 include the following: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced Crestmark management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year or the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. Crestmark is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on Crestmark’s consolidated financial condition and results of operations. RESULTS OF OPERATIONS Net Income Crestmark’s net income attributable to parent for 2017 was $29.1 million, as compared to $15.5 million in 2016, and $12.5 million in 2015. The primary source of income for Crestmark is its net interest income, which increased $16.7 million or 25.3% to $82.7 million for the year ended December 31, 2017 from $66.0 million for the year ended December 31, 2016. The net interest margin remained relatively flat from 2016 to 2017. The net interest margin decreased from 10.18% to 9.44% from December 31, 2015 to December 31, 2016. The decrease in net interest margin was mainly due to a decrease in rates on leases from 2015 to 2016 and increases in both volume and rate on interest bearing liabilities. The income on commercial and consumer loans, factoring receivables, and leases increased $18.0 million primarily due to increased volume in 2017, while the cost of interest bearing liabilities increased $2.5 million due to volume in 2017. Crestmark management believes that volume increases were primarily driven by strong activity in the broader economy and as a result of Crestmark’s efforts to invest in and expand its leasing business since 2014. In addition, rental income from equipment on operating leases was $45.9 million in 2017 as compared to $34.4 million in 2016 and $17.8 million in 2015, as a result of the factors described above. Offsetting the rental income from equipment on operating leases was depreciation on equipment on operating leases of $37.2 million in 2017, $29.3 million in 2016, and $16.4 million in 2015. The increase in depreciation is primarily attributable to the growth in Crestmark’s leasing business. The impact of rental income from equipment on operating leases and related depreciation resulted in net earnings of $8.7 million in 2017, $5.1 million in 2016, and $1.4 million in 2015. Also contributing to the increase in net income for each of the years in the three-year period ended December 31, 2017 was a decrease in income tax expense in each such year over the prior year. Crestmark reported income tax (benefit) expense of approximately ($2.0) million in 2017, $2.6 million in 2016, and $5.4 million in 2015. This resulted in an effective tax rate of (7%), 11%, and 25% for the years ended December 31, 2017, 2016, and 2015, respectively. The decline in the effective tax rate in 2017 as compared to 2016 was primarily the result of an income tax benefit due to the re-measurement of the net deferred tax liability, as well as increases in energy related tax credits. This re-measurement during 2017 approximated $5.7 million and was based upon the enactment of a change in the federal corporate tax rate from 35% to 21% by the December 22, 2017 Tax Cuts and Jobs Act (“TCJA”). Without this one-time re-measurement adjustment reflected in income tax expense, the effective tax rate would have been 11.8% for the year ended December 31, 2017. In addition, Crestmark recognized $6.3 million, $2.5 million, and $1.3 million in credits related to investments in energy-related assets for the three years ended December 31, 2017, 2016 and 2015, respectively. 111